A Chilling Glimpse Inside a Madoff Feeder Fund

April 2, 2009

By RICHARD ESPOSITO

The Massachusetts Secretary of State alleges the Fairfield Greenwich Group, found by Walter Noel (right) knowingly misrepresented to its investors what it knew about Bernard Madoff's (left) Ponzi scheme operation and asserted it performed a level of due diligence that it did not actually perform.

Patrick McMullan/AP Photo

The clearest look to date of the relationship between Bernard Madoff and his feeder funds, one of which netted hundreds of millions in fees and which authorities say exposed investors to undisclosed risks, is put forth in new court documents filed by the Massachusetts Secretary of State, William Galvin.

One potentially damning accusation made by Galvin was that principals at the Fairfield Greenwich Group discussed among themselves the risk that Madoff would "blow up" and was aware of the gaps in its knowledge of Madoff's operation.

However, Galvin alleges Fairfield did not disclose those concerns to investors. Fairfield Greenwich, founded by Walter Noel, has been accused of fraud by Galvin who says the firm knowingly misrepresented to its investors what it knew about Madoff's operation and asserted it performed a level of due diligence that it did not actually perform.

The court papers detail a December 2005 telephone conversation that allegedly took place between Fairfield executives and Madoff in which Madoff counsels them on how to manage their conversation with the regulators when it comes to describing what they know about Madoff's operation.

Madoff: "Obviously, first of all, this conversation never took place, Mark, OK?"

Amit Vijaygergiya (Fairfield's Chief Risk Officer): "Yes, of course."

Later in the call, according to the court filing, Madoff counsels Vijaygergiya on how to have a discussion with the SEC, "the less you know about how we execute ... the better you are ... your position is, 'listen, Madoff has been in business for 45 years ... a well known broker. We make the assumption that he's doing everything properly.'"

Fairfield Manager Allegedly Wanted to 'Cover His Ass'

The court papers also cite an internal Fairfield e-mail between a fund manager in the U.S. and one in the U.K. as evidence that Fairfield, at a time when it should have been offering to repay performance fees, instead was continuing "the ruse that they had actually been doing due diligence."

"You mentioned that Fairfield used to get copies of some trades done by Madoff," the e-mail from Manuel Gomez of Fairfield Sigma to a colleague allegedly began. "In order to cover my ass, can I get some copies of those trades. I need to show people who invested in Sigma that I was doing due diligence in what is the largest scam in financial history."

Fairfield Greenwich Group Will 'Vigorously Contest' Allegations

Fairfield Greenwich Group says they will "vigorously contest the allegations" in the complaint.

"The allegations in the complaint brought against FGG by the Massachusetts Securities Division are false and misleading," said a spokesperson for Fairfield Greenwich Group.

"Contrary to the allegations, FGG conducted vigorous and robust monitoring on an ongoing basis of the Madoff investments. This monitoring was consistent with the representations made to investors in the Sentry funds. FGG has fully and completely cooperated with the Mass Securities Division investigation," said the spokersperson. "Unfortunately, Massachusetts has leapt to erroneous conclusions without completing its investigation and without even granting a meeting with FGG in an attempt to arrive at an accurate understanding of the facts."